Having Another Look at the Tapered Annual Allowance

Posted by Catriona Standingford on September 18, 2018 in Pensions, R04

Recently, we had a query on the tapered annual allowance for pensions, so we thought we would have another look at this, in particular because the new 2018 edition of the R04 manual does seem to have made it simpler (even than the method used in the pensions tax manual).

Firstly, it matters to those people who have adjusted income over £150,000 and threshold income of more than £110,000. The reduction follows a familiar £1 reduction for every £2 (over £150,000) pattern.

Before we calculate what adjusted income and threshold income is though, we need to start with the client’s gross taxable income worked out from their earnings, pension income, interest, dividends, rental income and trust income. We can then work out:

Threshold income

from the gross taxable income deduct gross pension contributions paid by the member or on their behalf by someone, other than their employer. To this figure, add any salary sacrifice figure set up after 9 July 2015, and finally deduct any lump sum death benefits that were taxed as income. If the threshold income figure you are left with is below £110,000, there is no taper and no need to calculate adjusted income. However, if the figure is greater than £110,000, we now work out:

Adjusted income

starting with the same gross taxable figure as before, we add any employer pension contributions and deduct any lump sum death benefits that were taxed as pension income; this gives the adjusted income figure. If this is more than £150,000, the annual allowance is tapered.

Remember too that the maximum reduction is £30,000, so anyone with income of £210,000 or more will still have a £10,000 annual allowance (£210,000 – £150,000 = £60,000/2 = £30,000).

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